(Reuters) - Citigroup Inc (>> Citigroup Inc), the third biggest U.S. bank by assets, reported its highest quarterly profit since the financial crisis as Chief Executive Michael Corbat's restructuring and cost-cutting efforts paid off and the bank's legal expenses plunged.

Under Corbat, who replaced Vikram Pandit as CEO in 2012, Citi has been selling retail operations in several countries, shrinking its U.S. branch network and disposing of non-core businesses.

The bank's shares rose 3 percent to a six-and-a-half year high of $58.18 on Thursday after its adjusted earnings handily beat analysts' estimates.

Operating expenses in Citicorp, which holds the bank's core businesses, fell 6 percent to $9.8 billion in the second quarter.

Citi shrank the assets of Citi Holdings, which houses businesses it plans to sell, by 22 percent compared with 19 percent in the first quarter. The unit posted earnings of $157 million.

"Through active expense and balance sheet discipline, we are on track to reach our financial targets for the year," Corbat said in a statement.

Corbat set out two years ago to increase Citi's return on assets and make it more efficient. He also aimed to raise the bank's return on equity, but faced hurdles when the U.S. Federal Reserve rejected his capital return plan.

The Fed finally approved the bank's new buyback plan in March and allowed it to raise dividend for the first time since 2008.

Citi's return on average assets was 1.06 percent in the quarter ended June 30, higher than Corbat's target of at least 0.9 percent for the year.

Efficiency ratio in the Citicorp unit was 55 percent, the midpoint of Corbat's target of 53−57 percent.

Revenue from Citi's fixed income business fell 1 percent to $3.06 billion, a much smaller decline than that reported by other Wall Street banks.

Goldman Sachs Group Inc (>> Goldman Sachs Group Inc), which reported a steep fall in profit earlier on Thursday, said net revenue from fixed-income, currency and commodity trading plunged 28 percent.

Bank of America Corp's (>> Bank of America Corp) fixed income revenue fell 9.3 percent, while JPMorgan Chase & Co (>> JPMorgan Chase & Co.) posted a 10 percent drop.

Citi's net income rose to $4.85 billion, or $1.51 per share, from $181 million, or 3 cents per share, a year earlier, when the bank was hit by a $3.8 billion legal charge.

Adjusting for legal costs and some accounting items, earnings rose 18 percent to $4.65 billion, or $1.45 per share, beating the average analyst estimate of $1.34 per share, according to Thomson Reuters I/B/E/S.

Total adjusted revenue fell 1.5 percent to $19.16 billion, coming slightly above analysts' expectations of $19.11 billion.

(Additional reporting by Anil D'Silva in Bengaluru; Editing by Kirti Pandey)

By Neha Dimri and David Henry